Monday, March 07, 2011

Paging Paul Krugman

Final counts showed that the two coalition parties — the Reform Party and the Pro Patria and Res Publica Union — had garnered 29 percent and 21 percent of the vote respectively, granting them a majority in the new Parliament. The main opposition party, the Center Party, had 23 percent of the vote, and the Social Democratic Party had 17 percent.

The vote reflects approval for a government that continued to embrace laissez-faire capitalism during the painful months after the global downturn. After Estonia’s economy shrank nearly 15 percent, the state reduced its budget by the equivalent of 9 percent of gross domestic product. Demand fell steeply, and unemployment crept up, early in 2010, to 19.8 percent.

But in contrast to their neighbors in Latvia, where economic troubles led to riots and the government’s collapse, Estonians stoically absorbed the suffering. These sacrifices allowed Estonia to join the euro zone in January, a move its leaders hailed as a sign that the country was on its way to achieving Western European standards of living. Meanwhile, the economy has been projected to grow by 4 percent this year, and unemployment has dropped to around 10 percent, according to the Estonian Unemployment Insurance Fund.

In other words, while budget cuts produced short-term pain the country experienced long-term gain with a halving of the unemployment rate and renewed economic growth. To place Estonia's budget cuts in perspective, it would be the equivalent of slashing the US federal budget by $1.28 trillion -- something worth keeping in mind amidst the debate over proposed GOP cuts of $61 billion.

It's also worth noting that Estonia is ranked by the Heritage Foundation as home to the world's 14th freest economy, partly due to a flat income tax (21 percent on both person and corporate income) that has been in place since 1994.